MIKE TOWNSEND: For investors, 2023 by almost any measure was a pretty great year. The year ended with nine straight weeks of market gains, propelling the S&P 500® across the finish line up about 24% for the year. The Nasdaq, led by a handful of big names, finished the year up a whopping 43%.
But the first week of 2024 put a bit of a damper on that momentum, with the S&P 500® losing about 1.5 percent and ending the nine-week streak of market gains. Was it a temporary blip or a sign of things to come?
Investors have a lot of anxieties about 2024. There is optimism that the Federal Reserve has managed the elusive "soft landing" by getting inflation under control without triggering a recession, but if inflation moves back up again, it could spook investors. Wars in Ukraine and the Middle East continue, with no easy resolutions in sight and the possibility that they flare up into something even larger. The U.S. election has unprecedented elements of uncertainty to it―and more than 60 other nations around the globe will also hold elections this year, with an estimated four billion people casting ballots.
So how can investors navigate what almost everyone agrees will be a highly unpredictable 2024? One way is to take note of what fund managers are doing. What are they tracking in the market right now, and how are they responding? And what lessons could you incorporate in your investing?
Welcome to WashingtonWise, a podcast for investors from Charles Schwab. I'm your host, Mike Townsend, and on this show, our goal is to cut through the noise and confusion of the nation's capital and help investors figure out what's really worth paying attention to.
Coming up in just a few minutes, I want to explore how money managers are looking at 2024―and how they get comfortable making tough decisions when faced with uncertainty and unpredictability. To do that, I'm going to turn to Omar Aguilar, the CEO and chief investment officer of Schwab Asset Management. He has spent his career watching the markets, overseeing funds with a variety of different strategies. He's a keen observer of the forces that can help and hurt investors as they seek to manage their finances through all different kinds of market environments.
But first, a few updates from here in Washington.
Congress returned to the nation's capital this week following the holiday break and is immediately facing a pair of deadlines to fund government operations and avert a government shutdown.
As a result of the last shutdown deal, reached in November, funding for five major federal agencies―the Departments of Agriculture, Energy, Housing and Urban Development, Transportation, and Veterans Affairs―runs out in just about a week, on January 19. The rest of the government is only funded through February 2. But virtually no progress has been made since November to reach agreement between the House and Senate on any of the 12 appropriations bills that fund every government agency and program.
Over the weekend, however, there was finally a big breakthrough: Congressional negotiators agreed on the overall spending figure for the year, the so-called "topline" number. For Fiscal Year 2024, which started back on October 1, Republican and Democratic leaders agreed to cap spending at $1.59 trillion―roughly the same amount that President Biden and former Speaker of the House Kevin McCarthy agreed to in the debt ceiling deal last summer. A few side agreements will push that number to about $1.66 trillion in spending. About $886 billion will go to defense spending and about $773 billion to non-defense spending.
Having the topline number allows the House and Senate appropriations committees to figure out how to divvy that up among every federal agency and program―those are the decisions that will form the 12 appropriations bills.
But even with this important agreement, there is a staggering amount of work to do in a very short amount of time to avert a shutdown. It will be virtually impossible for both the House and the Senate to draft, debate, and pass the bills before the deadline. Congress could pass a temporary extension of funding to give itself a few more weeks to button up the details, but House Speaker Mike Johnson said last fall that he would not support any additional short-term funding extensions. That puts the speaker in a bit of a corner, where he'll either need to go back on his word, likely angering conservatives, or start a potentially disruptive government shutdown. With a recent poll showing that the current approval rating of Congress is an absurdly low 8%, neither option is very appealing to the new speaker.
Further complicating matters in the House, Johnson's margin for error keeps getting smaller. Former Speaker Kevin McCarthy resigned from Congress at the end of December. Congressman Bill Johnson, an Ohio Republican, announced that he would leave Congress on January 21 to take a university presidency in his home state. And House Majority Leader Steve Scalise, a Republican from Louisiana, announced that he would be absent from Congress until at least early February while he undergoes treatment for cancer.
That means Republicans will hold a majority of just 218-213 for the next few weeks. And that's essentially a margin of just two seats, because if more than two Republicans join with Democrats to oppose a bill, that would be enough to defeat the bill in a vote on the House floor. And that makes passing these key legislative proposals very, very challenging. So buckle up for what will surely be a bumpy four weeks in Washington.
Meanwhile, the other major issue―the president's request for more than $100 billion in emergency aid for Ukraine, Israel, and Taiwan, as well as money for humanitarian aid and for border security―remains in limbo nearly three months after he called on Congress to act quickly to pass it. Failure to approve the more than $60 billion in aid for Ukraine has put that country in a precarious position in its war with Russia, as the United States ran through the last of its aid money by the end of December.
The aid has been held up by a call for tougher border policies. Senate negotiations on a border security package that includes both a boost in spending and policy changes have been ongoing for weeks and continued over the holiday break. Participants believe they're close to announcing a deal that could pass the Senate, though it is far from certain that any bipartisan deal negotiated among senators could pass the House, where Republicans are inclined to take a much harder line on border issues.
There's really no clear path forward here―and that's frustrating to the many supporters of Ukraine on Capitol Hill, who believe that aid should not be linked to the border controversy.
Finally, the presidential election of 2024 gets underway for real on Monday, when Iowa voters gather for their caucuses to make their choice for the Republican nominee. Former President Donald Trump continues to hold a large lead in the polls, with Florida Governor Ron DeSantis and former South Carolina Governor Nikki Haley locked in a close race for second place. Voting will then move on to New Hampshire, which holds the nation's first primary on January 23. Trump has a double-digit lead in polling there, too, though a surge from Haley over the last several weeks has some believing the outcome in New Hampshire could be much closer.
I speak with clients at many in-person events around the country, and there are always questions about the election. While elections are not the main focus of this podcast, there's no question that investors are anxious about the 2024 election. So we'll cover the race in the months ahead, as well as the critically important battles to win majorities in the House and Senate, with a focus on policy proposals, campaign promises, and other factors that could impact the markets.
On my Deeper Dive today, I want to explore what fund managers are thinking about as we begin 2024 and what individual investors can learn from that. To help me do that, I'm pleased to welcome Omar Aguilar to the podcast. Omar is the CEO and chief investment officer for Schwab Asset Management, where he's responsible for developing and overseeing the firm's investment strategies. He's been with Schwab for more than 12 years and has more than 25 years of investment management experience, including managing index, quantitative equity, and asset allocation strategies. He's as plugged in to what's going on in the markets as anyone I know. Omar, thanks so much for making the time to join me today.
OMAR AGUILAR: Happy to be here, Mike.
MIKE: Omar, we're just a few days into 2024, so I want to get right to it and find out what you expect this year. 2023 was a weird year for the markets. Strong start, big dip in the middle, strong finish. By the end of the year, S&P 500 was up about 24%, Dow Jones Industrial Average about 14%, and the NASDAQ around 43%—performance any investor should feel great about. But obviously, one of the strange realities of 2023, something that's been talked about a lot, was that seven companies, mostly tech companies, dominated the investing landscape. Now I've heard you say in recent interviews that we're nearing the end of a market cycle and that things may change quickly. So how does the weird nature of 2023 and this handful of big companies that attracted so much attention, how does that affect your thinking about where we are now and where we're headed in this market cycle?
OMAR: Yes, 2023 being a weird year is probably an understatement. It was very difficult to understand no matter where you thought it was going to happen. If you think about at the beginning of 2022, the information we had just a year ago, the central banks around the world were dealing with historical levels of inflation, and they were trying so hard to try to find ways to mitigate the implications of inflation because everybody was worrying, and for many people, and mainly investment strategists, they thought that the inflation was going to drive the global economy into a deep recession. So a big part of what was 2023 is just that transition of understanding whether or not we're going to be in a recession or whether or not we're going to escape that recession, especially in the context of an inverted yield curve and very aggressive policy for keeping interest rates higher. So when you put that into context, it is very confusing that when you look at the performance of equities was as good as what you described, with most equity indices did very well, not just in the U.S., but globally, in the context of, well, if we are in a softer economy with high inflation, potentially in a recession, you should expect equities to underperform, and that was not the case.
So the concept of the cycle is critical because normally it gets to be defined by how the economy performs. And in this particular case, the Federal Reserve and the inflation picture tends to be a big driver of where we are in the cycle. So I think a lot of us continue to be confused going into 2024 because we don't know which phase of the cycle we are. Are we in the late cycle, or we're starting into the early part of the recovery, and a big part of this debate tends to be in the concept of what these rolling recessions and rolling recoveries that we have discussed over the years. We saw that concept of rolling recessions going into the end of 2022 and into 2023 and we're now starting to see that set of rolling recoveries in different parts of the economy. What does that mean?
What that means is we expect more volatility. And that also means that we're starting to see a little bit of that gap between the so-called Magnificent Seven that you mentioned, those seven technology names, leaving that less of a gap with the rest of the market. And that's obviously very positive for the market going into 2024. So looking at … understanding where we are in the cycle going into '24 will basically determine performance of equity asset classes going into the remaining 2024.
MIKE: So what does that mean for the individual investor? As I think about what you're saying, you and others of our colleagues, Liz Ann Sonders being an example, have talked a lot about recessions, sort of littler recessions within the market rather than a big economic recession. Given that, are we starting to see a rollover in sectors that individual investors should be aware of?
OMAR: Absolutely. And I think this has been a very unique cycle. Every cycle is unique. But this one was particularly puzzling, mostly because we had that super big stimulus program that came globally from all central banks. As a result of COVID, the significant amount of fiscal stimulus providing that extra liquidity into the market by lowering rates to zero, and in some cases, especially overseas, negative rates in parts of the global economy, ended up creating that excess cash that had to do with consumers and also in the hands of certain corporations.
And what that does is that it provides a little bit of a cushion so that instead of having that full-blown recession that basically takes everything down, what we observe over the course of the last year and a half is what we call these rolling recessions where certain parts of the economy, like housing, like technology, it started to fall into recession without the rest of the economy following through. In particular, given the shape of the U.S. growth and the makeup of the U.S. economy, the consumer has been extremely resilient because the labor market hasn't gone into a recession.
And because the consumer, they haven't been in a recession either. So when you put all these pieces together, the normal rotation that we have, when at the end of the late cycle, again, going back to these four phases where the late cycle means you're in a very strained economy, everything is decelerating, we're going into a recession, you want to be defensive sectors, and more defensive areas tend to do better, in combination beginning the early cycle when you start to see areas that are a little more economically sensitive start to recover first, we're starting to see that dynamic.
So in anticipation of the end of the tightening of the Federal Reserve increase of rates, we're starting to see areas like financials, like consumer discretionary, areas that tend to be a little bit more towards that early part of the cycle doing much better than what they did last year. And at the same time, areas in the more defensive areas that tend to do well in the late part of the cycle is starting to just take a backseat. So we're starting to see a little bit movement that may put us in a place where we're still in that late cycle, but some parts of the sectors are starting to go into that early part of the cycle.
MIKE: Well, when you have these changes and this rotation of sectors, that brings about a need for investors to make changes to their portfolios. A lot of investors, of course, are in funds for the bulk of their portfolio. So I guess my question is, do fund managers, are they going to be making the moves to change up funds? And is that enough for investors to get better diversification? Or do we still face the problem that so many funds are holding the same names, the same securities, and we're kind of all in the same boat together?
OMAR: That is a great question. Diversification is still a tenet for any investment strategy. Yes, there is a significant amount of concentration, specifically in certain parts of the markets. Any strategy that holds either a large-cap growth or a large-cap index will end up having a certain amount of concentration and overlap in securities because most of large-cap growth and most of large-cap indices tend to hold significant weights in companies in the Magnificent Seven or any areas that tend to be mega caps. What we try to emphasize when we talk about this diversification concept is to try to create as much distance among the funds that you hold.
So if you end up having an area that is dedicated to large cap, try to find something that complements that in the case of, say, small cap, or even if it's the same large cap, try to find ways that it does have a different kind of weighting for those securities because you don't necessarily want to just be in those sectors or those areas that tend to overemphasize or have more weights to mega caps. So you try to just diversify in terms of size, meaning some large caps, some small caps. While they may be subject to different parts of the economic cycle, they tend to have less individual security concentration.
Similarly, we encourage people to basically look at areas like non-cap-weighted securities, areas that tend to be non-weighted, like even just an equal-weighted set of sectors, within large-cap, that allows you to have that extra level of diversification—that while you may still have overlapping names, the way that these things operate because of the type of factors that they run to, they tend to be different.
MIKE: Omar, we're heading into earnings season now. What is your expectation as we look at companies for the early part of 2024 here? A lot of expectation, I think, that the earnings will be a little bit down. What do you anticipate?
OMAR: Yeah, I think earnings are probably at the worst possible level of uncertainty. In other words, this is great for active managers, by the way. Anybody that has an active fund, this is probably the best part of what they have in overall because we will see a significant amount of dispersion in terms of performance among corporations going into 2024.
Overall as a market, I think the expectations tend to be that we're going to see probably the last phase of a slowdown of earnings, but the expectation is that throughout the course of the rest of the year, that things will improve. And a lot of that, because earnings and the economy tend to be tied together, will be also as a result of what we discussed earlier, which is where we are in terms of the economic cycle.
So the scenarios that we tend to discuss for the economy is that, yes, we will still have positive probability to get into a recession. And if that is the case, earnings will obviously come much, much lower as the economic activity will have a potential hit to revenue in terms of companies. The other scenario that we talk about is the fact that, well, what about if inflation picks up again, which basically end up having good earnings number, but profit margins will basically have an impact for corporations, therefore providing more volatility for equity prices. And the most common, probably the consensus, the one scenario in the economy that has the highest levels of probability, is the one that everybody talks about, which is this idea of a soft landing where we can see inflation continues to trend down, and we can see that resilient economy staying up.
The earnings expectations of what we see going into the year will be highly dependent on where the economy heads. And you know, in this particular case, if it's a soft landing, the expectation is that this fourth quarter will probably be the most uncertain. And then going into Q1 and into the rest of the year, we're going to see a pickup on positive growth for earnings.
MIKE: Related to that, Omar, obviously, is what direction the Fed heads. The Fed has been signaling the end of hikes. Market is anticipating rate cuts. Some places as soon as the end of this quarter. How much of a difference do you think what the Fed does is going to make to companies and to stock performances?
OMAR: I would say it's big. The impact on the Fed probably is winding down, but still a significant amount of influence in what the expectations are, but also what the potential future earnings might be for companies. And let me explain why we think that is the case. Over the course of the last two years, anything that has to do with Fed decisions—or even expectations of Fed decisions and the so-called dot plot—have had a significant impact in how bond yields react and how the fixed income volatility of yields change. And that has been the big driver of volatility for equities. And you know, it is kind of interesting because normally they don't go hand-in-hand.
They usually tend to be fairly uncorrelated. The last few years we have seen a significant correlation in terms of Fed decisions linking to bond yield volatility, linking to equity market volatility. And so the decisions on the Fed and even expectations on the Fed decisions will have an impact going forward. And I think the big part of the research that we have done through our Center for Financial Research, suggest that usually yields tend to have a significant amount of changes as we end the decision by the Fed. And the consensus today is that the Fed is done. And as you pointed out, the expectations are now that we're going to see cuts as early as March of 2024, which we believe is probably premature, given where we are labor-market-wise and where the economy is. And the Fed is not going to go to the point of giving up and say, well, I think we're done with our job on putting inflation down.
I think inflation is on the right track, but it's not near close to 2% that their target is, and therefore they're going to keep this higher for longer as much as they can, and I think the market will probably need to adjust to the expectations as opposed to like the Fed having to make clear decisions.
MIKE: You know, the Fed, obviously, Omar, just one of a lot of factors that's going to go into how the market performs this year. And as I mentioned earlier, this is a lot of unpredictable factors, at least it feels to this investor like a lot of unpredictable factors in 2024, both geopolitically and here at home. We mentioned the Fed. We have a potentially historic presidential election here in the U.S., but also elections around the globe in some 60 countries, more than four billion people potentially voting in the coming year. We have obviously uncertainty about what other central banks will do. We have two major wars in Ukraine and the Middle East continuing. Natural disasters seem to be both increasing in number and in severity. And so it feels like there's not really an end in sight for all of these things that are keeping the markets churning. So do you think we have more volatility ahead of us? And if that's the case, how do managers deal with it in the funds that they manage?
OMAR: Yes, great, great question. And certainly, all the sources of uncertainty will continue to provide volatility for markets, and I would say both bond yields as well as equities. I think, starting with what you describe, the central banks' decisions. I think inflation, economic growth, labor market, that is still not over. I think we're probably towards the tail end of that macro landscape. We even saw it at the end of last week, the first few days of trading in 2024, where the labor market report was fairly good, fairly strong. Then the next day we have the ISM report that basically had contradictory reports saying that the economy is slowing down and specifically the service sector is slowing down faster than anticipated, and that created additional volatility for the market. So as we go towards the true end of the tightening cycle across central banks, a lot of what we're going to expect is that what is going to happen with inflation, and any signs of inflation will obviously have more volatility into what decisions will have and at least short-term volatility.
The same thing goes into the geopolitical risk. As you describe, the tensions in the Middle East, the situation with Ukraine, and anything that has to do with geopolitical uncertainty will put more pressure on commodities, that is the natural reaction, but in general, just the sentiment of what people may have.
Sentiment about inflation, sentiment about geopolitical risk, sentiment about our U.S. political landscape will obviously continue to be a big driver of volatility going in through the next few quarters. And obviously as we go through the election cycle, even more as people start thinking about what will be the different responses from the political parties and the landscape of what that could be going in through this.
And I think the key component here is that this is all in the context of, are we going to be able to have that soft landing that I described. And that could actually provide a little bit of a relief, but the short-term volatility is something that will be with us at least for the first three quarters of this year.
MIKE: It won't surprise you, Omar, that the number one question I'm getting questions about is the U.S. election. So I want to ask you what you think that can mean for the markets. So historically, presidential election years have been pretty good for the markets, but it just feels, particularly to investors and clients that I talk to, that there's so much at stake in this election. So what do you say to investors who are worried about the election causing market turmoil, no matter who they're rooting for or what the outcome is?
OMAR: It is true, in any single election cycle, it is very natural to see short-term volatility, and the part that I always try to remind people is that, as you described, historical elections usually tend to be good for equities. It doesn't matter what the outcome is. Even in those years back in 2000 where there were lingering factors for defining who the winner was, even in those cases, after the uncertainty goes away, usually the market tends to have a rally because the uncertainty goes away.
And I think given the robust landscape of the U.S. economy and our political system, the outcome of this will create short-term volatility going into the election. And as we starting to see the primaries and we starting to see the debates and we starting to see the positioning, I think a big part of that will create that short-term volatility. But once the outcome is done, usually we tend to see positive results for the market. I would probably say in this case, especially as political parties discuss immigration, as well as just the relationship with China, that will create sources of volatility into the market, particularly as it relates to foreign relationships. But also as it relates to what is going to be the policy for immigration that will potentially provide a relief for inflation as labor market will have an extra set of workers that are needed in the U.S. given the demographics that we have. Those two things are linkages that will be clear for the market in terms of what policies will come after the election.
MIKE: Let's talk about bonds for a second. Bonds, quite a run, but when the Fed starts cutting rates, that picture is going to change a little bit. There's been a lot of talk over the last couple of years about whether the traditional 60-40 split for equities and bonds, whether that's still a good approach. What do you suggest when it comes to the 60-40 split, and maybe more broadly, what do you suggest for fixed income investors as we look ahead?
OMAR: In the last year, all year is bonds are back. And after a decade of people not necessarily being too happy about bonds, I think 2023 they saw a significant amount of activity, and I think that's not going to go away. I think if we still think about the concept of higher for longer—with higher interest rates with higher yields—the ability for fixed income investments to provide income and to provide total return, it is clearly an opportunity that we haven't had in a long time.
And I think it's great that we have. In fact this concept, you may remember that we talked for a decade, what they call TINA, which is "there is no alternatives" to equity, that TINA component has basically died. And now we basically have the opportunity to have that combination of fixed income and equities that always provides great diversification. We wrote an article not too long ago about the concept of 60-40. 60-40 is obviously what is called the balanced strategy. A lot of asset managers and a lot of people use that as a default, providing 60% of risky assets, 40% of fixed income just to balance the risk component. The reality is that for the decade after the financial crisis, the majority of performance of that 60-40 came from equities. Last year, we saw the first time a significant contribution for bonds into that total return portfolio. And that, obviously, is something that we believe will continue to be the case. Now, 60-40 fits for the risk profile that has that level of potential risk appetite. But the combination of equities and fixed income is always good. And in particular now, depending on your investment objective and your investment strategy, having income targets that use income from both equities and bonds, it is now probably the best option we have had in a long time.
MIKE: What about cash, Omar? A lot of people holding big cash positions through most of 2023 simply because interest rates made it easy to earn a nice return. With rates expected to come down later this year, is now the time to start moving that cash into other types of investments? If I'm kind of thinking like a fund manager, where should I be looking?
OMAR: Yes, cash is a clear discussion point for many, many investors. And I would probably say professional fund managers tend to do this every single week when we discuss our positions. The number one thing that I like investors to understand is holding cash is an investment decision. So most people try to think about their cash investment as something on the side, but it's not.
It is part of a whole investment strategy, no matter what percentage you have in cash, usually tends to have. Because what that does is that while cash gives you very little risk, if not no risk for holding it, it also prevents you from investing in other areas. What we tend to discuss with clients and with investment strategists is to say, well, is the return that you expect from cash better than anything that you can do in the rest of your risk profile for the horizon that you can have?
And if that is the case, then you should continue to hold cash in the way that you have it. If cash provides you that level of volatility tapering as well as the returns that you expect, that sounds good. But if you have other areas where you can have what we call the opportunity cost of investing in other equities or bonds, this is probably the best opportunity we have because, as we discussed, the Fed is in the process of finishing their cycle. And if not, maybe the end of their cycle.
And therefore the potential future cash yields are not going to be as attractive as they are now. So this is the perfect timing where you can start thinking about how to deploy that cash in other areas within fixed income. It doesn't necessarily need to go to the risky part of your portfolio. You can start increasing duration, as you start thinking about that, well, maybe the yield curve is actually now going to be in a positive shape. And as we go through this part of the cycle, the economy continues to do well, we go through the soft landing, maybe this is the perfect time to slowly start deploying that cash towards intermediate level bonds or trying to do other opportunities.
MIKE: Omar, I know you spend a lot of time thinking about the behavioral side of investing. Obviously, emotion plays a huge role in how individual investors make decisions, frankly, often to their detriment. How do portfolio managers keep the emotion out of investing? And is there anything that we can learn from fund managers to help us keep the emotion out of investing?
OMAR: Well, the first thing, and I would probably say Mike is, yes, we do a significant amount of work in behavioral finance. We tend to analyze ourselves in the way we make decisions, and we try to equate these to the way that investors perceive markets. And I would probably say to the audience, everybody's a human being. And therefore, if you ever feel that you don't know what to do. If you ever feel that you want to rush into a decision, if you ever feel that there are certain things that you're feeling the typical FOMO, you're missing out, and all of a sudden, you're like, "Oh, I want to jump in that bandwagon." Those are very natural reactions that humans have when you have influence on areas that are important to you—in this particular case, investments. I would probably say that there are a lot of work that we have done in terms of reading for what are the typical things that happen when there is market volatility, when there's downturns, when there is an increase in returns, and the typical things that you have to consider when you look at your long-term investment objectives and how to mitigate your own biases.
It is very common for people to think, oh my god, I feel that the market is running away from me. I should probably start jumping on it and put more money into the market or vice versa. The market is in a downturn and people feel the need to just get their money out and put everything in cash. Those are typical reactions that tend to do with behavioral biases that are very common. And especially nowadays when everybody has access to a phone, and the phone usually tends to have a lot of information and a lot of data that we receive on an ongoing basis, whether it's political news, whether it's market news, whether it's company news, whether it's anything else, and the need and that anxiety that comes from trying to react to it is something that is very common. So what we tend to do with folks is to basically say, all right, well, think about this. You in a long term setting, you need to think about where you are going. What is your investment objective? I always try to think about when you take a flight, let's say from California to New York, you always think about, well, I'm going to get to New York City, and that's your destination. So your long-term investment objective is you're going to get to your destination, whether it's retirement, whether it's investing for your daughter's wedding, whatever is your investment objective or your goal, you're always going to have that destination. And throughout that process, if you have any source of turbulence, you're not going to actually change your destination. So it's the same thing that happens with investments.
You know what your destination is. You have a plan. You discuss with your advisor what is the best way to create that diversification and allows you to stay invested throughout the process, no matter what happens throughout this journey. And I think that's critical because once you have a plan on what are you going to do, when you hit these bumps of volatility, when you hit this turbulence, that's sort of what it is critical to mitigate your natural bias. And in some cases, your own financial advisor biases, that tend to be something that you can work together and then make sure that you have what I call a systematic plan on how to mitigate traditional behavioral biases that all of us have.
MIKE: Omar, you've shared a great deal of insight with us today. Let me just wrap up by asking you, what are the two or three things you think are most important for individual investors to be doing here at the beginning of 2024?
OMAR: I would probably say there's three things that I think are critical for investors at the beginning of this year, but in general. Stay invested. That is the number one thing that I tend to just overly emphasize. It is very important for people to stay invested and keep the course of their investments throughout this area. A typical thing that we tend to say is market timing is very difficult. So trying to get in and out of the market is just very, very difficult. Even for experienced portfolio managers is very hard to do. So that's number one.
Number two, stay diversified. We talk a little bit about this, but diversification, even though it sounds like a cliche, it is still very critical for anything that you do. You will have positions in your portfolio that will do well. There will be positions in your portfolio that will not necessarily do well, and that's OK. That's the reason you have these portfolios where if you ever get into a place where everything is doing poorly or everything is doing well, you need to rethink about your diversification components. So diversify yourself, trying to find opportunities, especially now between equities, fixed income, cash. This is probably the best time that we have had in a long time where a lot of asset classes can contribute to your own investment strategy.
And the last thing, stay disciplined. We talk about the behavioral aspects. Discipline provides that component of being systematic. We as professional money managers, we do that all the time. One of the things that we need to define there is, when are you going to rebalance? How often are you going to rebalance? You're going to rebalance every quarter. Are you going to rebalance when you hit certain limits? Are you going to rebalance on an annual basis?
What are those things that you're going to do and keep that discipline? Think about what is the best way to use volatility to your advantage. I always talk to clients about the fact that when you have short-term volatility, that's the perfect time for you to use tax-efficient strategies to allow you to take advantage of that volatility without getting out of the market. So being conscious about that discipline allows you to take advantage even when you see things that are not necessarily in your control. So stay disciplined, stay diversified, and stay invested are the three things that I will continue to emphasize for all investors.
MIKE: Great advice to end on. Omar, really enjoyed our conversation today. Thanks so much for joining me.
OMAR: Thanks for having me.
MIKE: That's Omar Aguilar, CEO and chief investment officer at Schwab Asset Management.
Well, that's all for this week's episode of WashingtonWise. We'll be back with a new episode in two weeks. Take a moment now to follow the show in your listening app so you don't miss an episode. And if you like what you've heard, leave us a rating or a review—those really help new listeners discover the show.
For important disclosures, see the show notes or schwab.com/washingtonwise, where you can also find a transcript.
I'm Mike Townsend, and this has been WashingtonWise, a podcast for investors. Wherever you are, stay safe, stay healthy, and keep investing wisely.
